‘Overheating’ warning for real estate market

With both price-to-income and price-to-rent ratios currently sitting at record levels, a leading ratings agency believes the Australian real estate market is at risk of overheating.

Moody's Investors Service's report, released last Thursday, revealed housing prices continued to rise in the first quarter this year as average year-on-year growth in the eight largest cities inched up to 8.3 per cent, marking the highest growth rate in nearly four years.

The agency pointed to a number of key factors driving its assessment that the real estate market might need some cooling off. 

"Considering supply-side constraints, the influx of foreign capital and the fact that monetary policy is set to remain accommodative for the foreseeable future, the housing market appears to be increasingly likely to get caught up in a positive price-feedback loop and eventually could face a correction,” stated the report.

Moody’s said the relative stability of consumer confidence indicators in recent years was remarkable given "the headwinds that Australian households have been facing".

"Most notably, the strong gains in consumer-driven economic activity coincided with rising unemployment and deleveraging in the private sector. These trends were, nonetheless, counteracted by sustained earnings growth, cheap credit and positive wealth effect from rising housing prices," said Moody's

It added that the latter trend poses some medium-term risks as Australia's real estate market appears to be overheating, with both price-to-income and price-to-rent ratios reaching levels well above the historical averages.

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